Gordon Nixon, RBC's chief executive officer, said the bank never received an explicit threat from U.S. banking regulators but the theoretical threat was abundantly clear.

"If the bank were in violation of U.S. laws, the ramifications would be very significant," he said in a phone interview yesterday.

"There could be fines or the institution could be forced to close or restructure its U.S. operations. The U.S. bank managers could face legal liability too." In the worst-case scenario, RBC Dominion Securities, the bank's massive investment banking, trading and research arm, would have to close its U.S. business. In fiscal 2006, RBC derived 16 per cent of its $4.7-billion in profit from the U.S. About one-third of RBC Dominion's revenue comes from U.S. sources.

American banking regulators have issued "cease-and-desist" orders against Canadian banks in the past. In late 2003, CIBC settled a U.S. Department of Justice probe into the bank's relationship with Enron Corp. by paying a $80-million (U.S.) fine and agreeing to exit certain lucrative U.S. businesses, such as asset securitization and other structured products.

Last year, RBC's U.S. retail bank, RBC Centura, faced a lesser probe from North Carolina's Commissioner of Banks and the U.S. Federal Reserve Board. The two regulators performed a joint "informal investigation" into Centura's compliance with the Patriot Act, the Bank Secrecy Act and "other anti-money laundering statutes." The upshot was that the regulator wouldn't allow Centura to buy other U.S. banks until it cured the compliance problems (which it did).

No Canadian bank has been fined by U.S. regulators for allegedly violating U.S. banking rules on U.S.-dollar accounts and transactions.

But two European banks, ABN Amro Bank NV and UBS AG, did get fined in recent years.

The case illustrates how many banks run into problems when they expand in the U.S., probably the world's most regulated banking market. "I find this an offensive situation, but I don't really blame the banks because the banks have to follow the law if they are to operate in the United States," said John McCallum, a Liberal MP and RBC's former chief economist. The situation amounts to "an extraterritorial application of U.S. law and I think we have to fight it," he said.

RBC has been cleaning up the compliance on its U.S.-dollar accounts to prevent retaliation by American regulators, including the Treasury Department's Office of the Comptroller of Currency. The effort saw RBC close the U.S.-dollar accounts held by several hundred customers who hold Canadian citizenship and passports from countries under U.S. sanctions: North Korea, Iran, Iraq, Cuba, Sudan and Myanmar, the former Burma.

RBC officials explained that customers with a U.S.-dollar account are subject to the full suite of U.S. banking, money-laundering and anti-terrorism laws and regulations. Any U.S.-dollar account is "really an account with Royal's New York City branch," an official said. Cheques written on the account are cleared through the U.S.

bank clearing system and therefore subject to U.S. oversight.

RBC says that, as far as it knows, none of the holders of U.S.-dollar accounts is under investigation by U.S. authorities, nor has the bank been asked to provide information on the customers to the authorities.

RBC clarified Wednesday that it will open accounts to customers with dual citizenships -- provided they aren't living outside the country for extended periods of time. It's unclear precisely how long a client needs to be outside the country for the bank to raise a red flag.

Toronto-Dominion Bank confirmed yesterday it hasn't closed any accounts, nor denied anyone a new account based on their citizenship.

Bank of Nova Scotia wouldn't comment.

The dual citizenship issue raises an important question about privacy rights, said Omar Alghabra, the federal Liberal citizenship critic.

"I really don't see any legitimate business reason a bank needs to know your citizenship to open an account," Mr. Alghabra said.

Canadian banks are subject to the Personal Information Protection and Electronic Documents Act, which says institutions generally should limit the collection of private information and must tell people why they are being asked for the information.

The Office of the Privacy Commissioner can investigate complaints.

But nobody has yet complained about RBC or any other Canadian bank in the case of the U.S.- dollar accounts, says Anne-Marie Hayden, the spokeswoman for the commissioner.

Ins and outs of U.S.-dollar accounts Why does the U.S. Treasury care about the bank accounts of Canadians and other foreigners? The U.S. dollar is the world's most widely accepted currency and U.S. officials have traced foreign cash transfers directly to terrorist plots. Stop the flow of money and the killing will stop, they argue.

Can the United States dictate who can and can't hold U.S.-dollar bank accounts? Indirectly, yes. Transfers in or out of any U.S. dollar account, including cheques, must be cleared by a U.S. bank. Royal Bank of Canada, for example, clears all of its U.S. dollar cheques at a branch in New York. Other Canadian banks use U.S. intermediaries.

These transactions are subject to all applicable U.S. laws.

Are Canadian banks imposing stricter standards than U.S. banks? In some cases, yes. All banks use risk assessment techniques to prevent running afoul of anti-terrorism laws. In some cases, that means denying services to individuals at greater risk of breaking the rules. U.S. law, for example, prohibits banks from offering any services to "persons in Iran." That's why RBC won't open U.S.-dollar accounts for individuals who routinely travel to Iran.

Don't Canadian banks worry about becoming a tool of U.S. foreign policy? Maybe. But the U.S. market is too lucrative and important for Canadian institutions to forsake. RBC, for example, has 600,000 U.S. dollar accounts. And like other Canadian banks, RBC also has extensive U.S. operations that depend on cordial relations with U.S. regulators. They risk steep fines for violating U.S. laws.

What U.S. entity enforces U.S. sanctions laws? The U.S. Treasury Department's Office of Foreign Assets Control is mandated by the President to develop and enforce sanctions against foreign countries, terrorists, international narcotics traffickers, and people involved in the proliferation of weapons of mass destruction.